ORDER
R.P. Garg, Member
1. This is an appeal by the revenue against the order of the DCIT(A), for the assessment year 1989-90. The grounds raised are:
(i) On the facts and in the circumstances of the case and in law, the learned DC(A) erred in directing the Assessing Officer to recompute the deduction under Section 80HHC of IT Act, after including the service charges of Rs. 32,848, without reference to the facts on which the findings of the Assessing Officer in the assessment order were based.
(ii) On the facts and in the circumstances of the case and in law, the learned DC(A) erred in deleting the addition of Rs. 20,175 made on account of interest on debit balance of partners, without reference to the facts on which the findings of the Assessing Officer in the assessment order were based.
2. The assessee had claimed Section 80HHC deduction of Rs. 3,42,277, whereas the Assessing Officer allowed it at Rs. 3,36,241. He made two adjustments to the assessee’s profits while considering the claim of the assessee : (i) addition of Rs. 20,175 being the amount of interest disallowed as pertaining to debit balances; and (ii) reduction of Rs. 32,848 being the service charges which, according to him, is not a profit relatable to export profits and, therefore, deduction under Section 80HHC has to be by reducing this amount. He took the help of Section 80AB of the Act and held that for the purposes of Section 80HHC, the income of the assessee shall be deemed to be the income of that nature only and, therefore, 80HHC deduction is to be allowed only in respect of profits derived from export. In appeal, the DCIT(A) allowed the interest payment as permissible deduction and directed the Assessing Officer to recompute the deduction after including the service charges of Rs. 32,848. He proceeded with the case as if the assessee’s claim was that service charges are part of export turnover as defined in Explanation (b), below Section 80HHC of the Act. Feeling aggrieved, the revenue is in appeal.
3. The learned Departmental Representative, Sri N.A. Kazi and the learned counsel for the assessee, Sri S.S. Shah were heard. Their rival submissions considered. The first dispute is whether the interest payment of Rs. 20,175 could be disallowed. The opening debit balance of all the partners was Rs. 83,840. A sum of Rs. 2,79,400 was withdrawn by the partners during the year under consideration. Thus, the total debit balance at the end of the year was Rs. 3,62,240. The assessee had made a profit of Rs. 4,32,400 and if that is taken into consideration, there was a credit balance of Rs. 1,10,160 at the end of the year. In these circumstances, in my opinion, the disallowance of interest as pertaining to the debit balance of the partners is not justified. I do not find any force in the submission of the learned Departmental Representative that the profit accrued at the end of the year and, therefore, credit therefor cannot be given. The profit accrues on each and every sale, but ascertained at the end of the year. The profit was, thus, available to the assessee during the year under consideration, though ascertained at the end of the year. If that amount is taken into consideration, there would be no debit balance on which the interest can be disallowed. The disallowance of Rs. 20,175 was accordingly rightly deleted by the DCIT(A) and also excluded from the profit taken into consideration for the purposes of deduction under Section 80HHC of the Act.
4. As regards the service charges, the learned Departmental Representative submitted that the same could not form part of the export turnover. This has some force. Explanation (b), below Section 80HHC requires that the export turnover should be receivable in convertible foreign exchange by the assessee. Admittedly, the service charges were not received by the assessee in convertible foreign exchange and, therefore, they cannot form part of the export turnover, as held by the DCIT(A). The learned counsel for the assessee, however, states that the assessee never made a claim before the Assessing Officer that the service charges are part of export turnover. The assessee’s claim was that in computing the profit derived from the export of goods or merchandise, the service charges of Rs. 32,848 could not be reduced from the assessee’s income, computed under the head “Profits and gains of business or profession”. The Assessing Officer has reduced that amount from the business income which he submits, is not in accordance with law. The learned Departmental Representative, supporting the order of the Assessing Officer, submitted that 80HHC grants deduction on export profits and service charges being not in the nature of export profits, the same could not form part of the profits of the assessee from business of exporting goods or merchandise and, therefore, the Assessing Officer was justified in excluding the same.
5. Section 80HHC of the Act, provides deduction in respect of profits derived by an assessee from export of goods or merchandise. It provides:
Where an assessee, being an Indian company or a person other than a company resident in India, is engaged in the business of export out of India of any goods or merchandise to which this section applies, there shall, in accordance with and subject to the provisions of this section, be allowed In computing the total income of the assessee, a deduction of the profits derived by the assessee from the export of such goods or merchandise.
Sub-section (3) provides as to how that profit is to be computed. It reads as under:
(3) For the purposes of Sub-section (1), profits derived from the export of goods or merchandise out of India shall be,-
(a) in a case where the business carried on by the assessee consists exclusively of the export out of India of the goods or merchandise to which this section applies, the profit of the business as computed under the head ‘Profits and gains of business or profession’;
(b) in a case where the business carried on by the assessee does not consist exclusively of the export out of India of goods or merchandise to which this section applies, the amount which bears to the profits of the business (as computed under the head ‘Profits and gains of business or profession’) the same proportion as the export turnover of the business carried on by the assessee.
6. The business carried on by the assessee did not consist exclusively of export out of India of goods or merchandise, therefore, its case does not fall in Clause (a), of Sub-section (3), of Section 80HHC. It falls in Clause (b) thereof. As per this Clause (b), the profit derived from export of goods or merchandise out of India is to be the amount which bears to the profits and gains of the business the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee. The profits of a business has to be computed in accordance with the provisions of the Income-tax Act. The assessee’s export turnover is Rs. 24,91,292 and its total turnover is Rs. 24,96,841. Both the assessee and the Assessing Officer admit these figures and there is no dispute with regard thereto. There is also no dispute that the service charges are profits of the business carried on by the assessee as the same had been offered by the assessee and computed by the Assessing Officer under the head “business income”. In these circumstances, they would form part of the profits and gains computed under the head “business or profession” under Section 28 of the Act. Once that position is accepted, the proportion of the export turnover and the total turnover has to be that with reference to that profit as that would be the profit computed under the head “profits and gains of business or profession”. One cannot, thereafter, be justified to say that the service charges have to be excluded therefrom on the ground that the same did not amount to “profit derived from export of goods or merchandise”.
7. The submission of the learned Departmental Representative, however, is that because of the provisions contained in Section 80AB of the Act, the profit eligible to deduction has to be the income of the nature only and the service charges not being income derived from export, would have to be deducted from the profit of the assessee. In my opinion, it has no force. Section 80AB of the Act reads as under:
Where any deduction is required to be made or allowed under any section except Section 80M included in this Chapter under the heading ‘C-Deductions in respect of certain incomes’ in respect of any income of the nature specified in that section which is included in the gross total income of the assessee, then, notwithstanding anything contained in that section, for the purpose of computing the deduction under that section, the amount of income of that nature as computed in accordance with the provisions of this Act before making any deduction under this Chapter shall alone be deemed to be the amount of income of that nature which is derived or received by the assessee and which is included in his gross total income.
8. On a careful reading of this provision, it would be clear that it provides a clarification with a non-obstantive provision to the effect that for computing the deduction under any of the sections of Chapter VIA (Section 80HHC in this case), the amount of income of that nature alone (profits from export of goods and merchandise in this case) shall be deemed to be the amount of that nature which is derived from or received by the assessee and which is included in the gross total income. Sub-section (3) of Section 80HHC provides the definition of the export profit which is entitled to the export incentive deduction. When it provides that profit derived from export of goods or merchandise is a particular amount, that would, in my opinion, be the ainount in the nature of profits derived from export of goods or merchandise and that would be the amount entitled to deduction under Section 80HHC. Section 80AB of the Act also talks about the prqfit of that nature in respect of which Section 80HHC deduction is allowable and when that amount of profit has been defined under Section 80HHC, one cannot thereafter say that it did not represent profit derived from export of goods and, therefore, not entitled to Section 80HHC deduction. I find no substance in the revenue’s submission that the profit computation under the head “Profits and gains of the business or profession” has to be also of the export profit. It would amount to ignoring the provisions of Section 80HHC(3). A statutory formula, to arrive at the profit derived from the business of export of goods or merchandise, is provided or devised by the Legislature by enacting the provisions of Sub-section (3) of Section 80HHC.
9. This can also be examined with reference to a person who is engaged exclusively in export of goods or merchandise. Clause (a) of Sub-section (3) of Section 80HHC provides that the profit derived from export of goods would be the profit as computed under the head ‘Profits and gains of business or profession’. The entire business income is deemed as profit derived from export of goods. Could it be said that, the service charges which are admittedly in the nature of business profits are to be excluded? In my opinion, the answer is in the negative. It may also be useful to refer to the Board’s Circular No. 564, dated 5th July, 1990, reported in 184 ITR St. 137, wherein in paragraph 4, it is stated that Sub-section (3), of Section 80HHC statutorily fixes the quantum of deduction on the basis of a proportion of the profits of business under the head “Profits and gains of business or profession” irrespective of what could strictly be described as “profits derived from the export of goods or merchandise out of India”. Deduction to a person falling under Clause (a), of Section 80HHC(3) would be the amount of profits computed under the head “Profits and gains of a business or profession”. On the other hand, the deduction to a person falling under Clause (b) thereof is to be computed in the following manner:
Export turnover
Profits of the business x —————-
Total turnover
10. In these circumstances, in my opinion, the Assessing Officer was not justified in reducing the amount of service charges from the profits of the assessee in arriving at the deduction of the profit derived from the export of goods or merchandise out of India. It is the amount which bears to the profits of the business the same piroportion as the export turnover of the assessee in respect of which goods bears to the total turnover of the business carried on by the assessee. In the result, the amount of deduction of Rs. 3,42,277 claimed by the assessee was in accordance with law. I, therefore, uphold the order of first appellate authority, though for different reasons.
11. In the result, the appeal is dismissed.